3.Corporate Management

8/6/2019 3.Corporate Management

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NVDS.RAJU



` Company formed and registered under

³the Indian companies act -1956´.

` The act came into force from 1/4/1956.



` The word 'Company' is an amalgamation of the

Latin word 'Com' meaning "with or together" and

'Pains' meaning "bread". Originally, it referred to agroup of persons who took their meals together .



` A company is nothing but a group of persons who

have come together or who have contributed

money for some common person and who have

incorporated themselves into a distinct legal entityin the form of a company for that purpose.



` ³the term "company" has been defined as acollection of many individuals united into onebody under special domination,

` having perpetual succession under an artificial

form and vested by the policies of law with thecapacity of acting in several respect as anindividual, particularly for taking and grantingof property,

` for contracting obligation and

` for suing and being sued,` for enjoying privileges and immunities in

common.



` Separate Legal Entity :under law, a company becomes a separate legal entityas compared to its members.

` The company is different and distinct from itsmembers in law.

` It has its own name and its own seal, its assets andliabilities are separate and distinct from those of itsmembers.

` It is capable of owning property, incurring debt,borrowing money, having a bank account, employingpeople, entering into contracts and suing and beingsued separately.



` The liability of the members of the company is

limited to contribution to the assets of the

company up to the face value of shares held by

him.

` A member is liable to pay only the uncalled money

due on shares held by him when called upon to

pay and nothing more, even if liabilities of thecompany far exceeds its assets.



Perpetual Succession: A company does not die or cease to exist unless itis specifically wound up or the task for which it

was formed has been completed.

Membership of a company may keep on changingfrom time to time but that does not affect life of thecompany.

Death or insolvency of member does not affect theexistence of the company.



` Separate Property:

A company is a distinct legal entity.

` The company¶s property is its own.

` Amember cannot claim to be owner of the

company's property during the existence of the

company.



` Transferability of Shares:

Shares in a company are freely transferable.

` When a member transfers his shares to another person, the transferee steps into the shoes of the

transferor and acquires all the rights of the

transferor in respect of those shares.



` Common Seal: A company is a artificial person and does not have a physicalpresence.

` Therefore, it acts through its Board of Directors for carrying out

its activities and entering into various agreements.

` Such contracts must be under the seal of the company. Thecommon seal is the official signature of the company. The nameof the company must be engraved on the common seal.

` Any document not bearing the seal of the company may not beaccepted as authentic and may not have any legal force.



` Capacity to sue and being sued:

`

A company can sue or be sued in its own name as

distinct from its members.



` Separate Management:

`

A company is administered and managed by its

managerial personnel i.e. the Board of Directors &management functionaries.

` The shareholders are simply the holders of the

shares in the company and need not benecessarily the managers of the company.



` One Share-One Vote:

`

The principle of voting in a company is one share-

one vote. i.e. if a person has 10 shares, he has 10votes in the company.

` This is in direct contrast to the voting principle of aco-operative society where the "One Member -One Vote" principle applies i.e. irrespective of thenumber of shares held, one member has only onevote.



` A Partnership firm is sum total of persons who

have come together to share the profits of the

business carried on by them or any of them. It

does not have a separate legal entity.

` ACompany is association of persons who have

come together for a specific purpose. The

company has a separate legal entity as soon as itis incorporated under law



` Liability of the partners is unlimited.

` However, the liability of shareholders of a limited

company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by

the shareholder .



` Property of the firm belongs to the partners and they

are collectively entitled to it. In case of a company, the

property belongs to the company and not to its

members. A partner cannot transfer his shares in thepartnership firm without the consent of all other

partners.

` In case of a company, shares may be transferred

without the permission of the other members, in

absence of provision to contrary in articles of

association of the company.



` In case of partnership, the number of members mustnot exceed 20 in case of banking business and 10 inother businesses. A Public company may have asmany members as it desires subject to a minimum of

7 members. A Private company cannot have morethan 50 members.

` There must be at least 2 members in order to form a

partnership firm. The minimum number of membersnecessary for a public limited company is seven andtwo for a private limited company.



` In case of a partnership, 100 % consensus is

required for any decision. In case of a company,

decision of the majority prevails.

` On the death of any partner, the partnership isdissolved unless there is provision to the contrary.

` On the death of the shareholder the company'

existence does not get terminated.



` Under the Companies Act, 1956, not more than 20

persons can come together for carrying on any

banking business .

` Any association which does not comply with the

above norms is an illegal association.



` An illegal association is not recognized by law.

` cannot enter into any contract, cannot sue any

members or any outsider, cannot be sued by any

members or outsiders for any of its debts. ` The members of the illegal association are

personally liable for the obligations of the illegal

association.



` A public company must have at least 7 memberswhereas a private company may have only 2members.

` If the number of members fall below the statutoryminimum and the company carries on its businessbeyond a period of six months after the number has so fallen, the reduction of number of members

below the legal minimum is a ground for thewinding up of the company.



` Act can override MO A & AO A.

` Formation of company law board.

` Companies can not be registered with undesirable

names.` Prohibition of allotment of shares unless minimum

subscription is received.

` Audit committee must be in place where paid up

capital is Rs 5 crores.



` Restriction on loans to directors of the company.

` MD to one company .

` MD to be appointed not more than 5 years at a

time.

` No person to be Director of more than 7

companies.



` Refer cases to CLB against managerial personnel

± frauds.

` Power to enter & enforce compromises /RECONSTRUCTION/ AM ALG AM ATION with

creditors-CLB.

` CLB power to prevent change of directors to avoid

likely affect on the company.



` Through a special resolution.

` Default by company.

` If company does not commence business after oneyear of incorporation or suspends business for onewhole year .

` If members go below 7 in case of public ltd .

` If company is unable to pay its debts.



` A private company will be treated as a deemedpublic limited company in any of the followingcircumstances :-

` Where at least 25% of the paid up share capital

of a private company is held by one or morebodies corporate, the private company shallautomatically become the public company .

` Where the annual average turnover of the

company during the period of 3 consecutivefinancial years is not less than Rs 25 crores,the private company shall be, irrespective of itspaid up share capital, become a deemed publiccompany.



` Where not less than 25% of the paid up capital of

a public company limited is held by the private

company, then the private company shall become

a public company.

` Where a private company accepts deposits after

the invitation is made by advertisement or renews

deposits from the public, such companies shallbecome public.



` Companies may be limited or unlimited companies.

` Company may be limited by shares or limited byguarantee.

` The liability of members is limited to the amount of uncalled share capital.

` No member of company limited by the shares can becalled upon to pay more than the face value of shares

or so much of it as is remaining unpaid. ` Members have no liability in case of fully paid up

shares.



` A company limited by guarantee is a registered companyhaving the liability of its members limited by itsmemorandum of association to such amount as themembers may respectively thereby undertake to pay if

necessary on liquidation of the company.

` The liability of the members to pay the guaranteed amountarises only when the company has gone into liquidationand not when it is a going concern.

` A guaranteeing company may be a company with sharecapital or without share capital.



` Unlimited Company: The liability of members of

an unlimited company is unlimited. Therefore their

liability is similar to that of the liability of the

partners of a partnership firm.` Section 25 Companies: Under the Companies

Act, 1956, the name of a public limited company

must end with the word 'Limited' and the name of

a private limited company must end with the word'Private Limited'.



` However, under Section 25, the Central Governmentmay allow companies to remove the word "Limited /Private Limited" from the name if the followingconditions are satisfied ±

` The company is formed for promoting commerce,science, art, religion, charity or other socially usefulobjects.

` The company does not intend to pay dividend to itsmembers but apply its profits and other income inpromotion of its objects.



` A company shall be deemed to be subsidiary of

another company if :-

` That other company controls the composition of itsboard of directors ; or

` That other company holds more than half in face

value of its equity share capital .



` The control of the composition of the Board of

Directors of the company means «

` that the holding company has the power at its

discretion to appoint or remove all or majority of directors of the subsidiary company without

consent or concurrence of any other person.



` Means any company in which not less than 51%of the paid up share capital is held by the CentralGovernment or any State Government or partly byBOT H«

` Government Companies are also governed by theprovisions of the Companies Act.

` Central Government may direct that certainprovisions of the Companies Act shall not apply.



` Means a company incorporated in a country

outside India under the law of other country and

has established the place of business in India.



` No company, without obtaining the priorapproval of the Central Government in thisbehalf, can make any loan to, or give anyguarantee or provide any security TO±

` Any director of the lending company or of acompany which is its holding company orany partner or relative of any such director

` Any firm in which any such director or

relative is a partner` Any private company of which any such

director is a director or member



` The above provision shall not apply to any loan

made, guarantee given or security provided-

` by a banking company

` by a private company unless it is a subsidiary of a public company

` shall not apply to any loan made by a holding

company to its subsidiary.

` shall not apply to guarantee given or securityprovided by a holding company in respect of a

loan made to its subsidiary.



` Boards sanction be required for certaincontracts in which particular directorsare interested.Ex

cept with the consent of the Board of directors, shall not enter into any contractwith the company-

` for the sale, purchase or supply of any

goods, materials or services` for underwriting the subscription of any

shares in, or debentures of, the company.



` Interested director not to participate or vote inBoards proceedings

`

No director of a company shall, as a director, take

any part in the discussion of, or vote on, anycontract or arrangement entered into, or to beentered into, by or on behalf of the company.

` Nor shall his presence count for the purpose of

forming a quorum at the time of any suchdiscussion or vote and if he does vote, his voteshall be void.



` The Companies Act, 1956 does not make attempt

to define the term ³Director´.

` Rather it entails the provision of the directors interms that ³director includes any person occupying

the position of a director, by whatever name

called´.



` BOWEN LJ. has made efforts to define the

position of the director in following words:

`Directors are described sometimes as

agents, sometimes as trustees andsometimes as managing partners.



` Under the Companies Act directors are

accountable to for their acts done on behalf of the

company.

`

strict compliance with the various provisions of the Act

` fiduciary relationship with the company.



` Board of directors "directs" thecorporation's affairs and business path.

` The board of directors also has ultimatelegal responsibility for the actions of the

corporation and its subsidiaries, officers,employees, and agents.

` A corporate director's duties andResponsibilities typically include:

` Acting on behalf of the corporation and itsbest interests with an appropriate "duty of care" at all times;



` Acting with loyalty to the corporation and itsshareholders;

` Participating in regular meetings of the boardof directors;

` Approving certain corporate activities andtransactions - including contracts andagreements; election of new corporateofficers; asset purchases and sales, approvalof new corporate policies; and more;

` Amending the corporation's bylaws or articlesof incorporation



` The number of directors serving on a corporation's

board usually depends on the size of the

business and its holdings, as per AO A.

` For voting purposes, a corporation should keep

an odd number (3, 5, 7, etc.) of directors on its

board.



` 1.To file return of allotment: Section 75 of theCompanies Act, 1956 requires a company to filewith the Registrar, within a period of 30 days, areturn of the allotments stating the specified

particulars. ` 2.Not to issue irredeemable preference shares .

` Section 80, as amended by Amendment Act,1996, forbids a company to issue irredeemable

preference shares or preference sharesredeemable beyond 20 years.



` The directors must act in the best interest of thecompany on Going Concern basis.

` In Burland v. Earle18, the director was instructed topurchase some property for the company. But he first

purchased the same for himself and then sold it to thecompany for the profit. The lower court held him liablefor the profit so made, which in equity belonged to thecompany.

` A director can not escape from his duty to account for

his profit by resigning from his office of director inorder to obtain a profit thereafter .



` The directors of a company must discharge theirduties and obligations with skill and diligence asexpected from a reasonable person of hisknowledge and experience...

` Duty not to delegate:

` Director being an agent is bound by the maximdelegatus non potest delegare, whichmeans a delegatee can not further delegate.

` Director must perform his functions personally.



` Directors are supposed to act within the parameters of the provisions of the Companies Act, Memorandumand Articles of Association, since these lay down thelimits to the activities of the company and

consequently to the powers of the Board of directors. ` powers of the directors may be limited in terms of

specific restrictions contained in the Articles of Association.

` Directors shall be held personally liable for acts

beyond the aforesaid limits, being ultra vires thecompany .



` Directors must act within their powers with

reasonable skill and care as expected of them as

prudent businessman, they discharge their duties

to the company.

` But where they fail to exercise reasonable care,

skill and diligence, they shall be deemed to have

acted negligently in discharge of their duties andconsequently shall be liable for any loss or

damage resulting therefrom.



` Directors are the trustees for the moneys and propertyof the company handled by them, as well as exercisesof the powers vested in them.

` If they dishonestly or in a mala fide manner, exercisetheir powers and perform duties, they will be liable forbreach of trust and may be required to make good theloss or damage suffered by the company by reason of such mala fide acts.

` They are also accountable to the company for any secretprofits they might have made in course of performanceof duties on behalf of the company.

` Directors can also be held liable for their acts of .misfeasance. i.e., misconduct or intentional misuse of powers.



` Liability under the Companies Act:

` 1.Prospectus: Failure to state any particulars as per

the requirement of the of the act or mis-statement of

facts in prospectus renders a director personally liable

for damages to the third party.

` Director shall be liable to pay compensation to every

person who subscribes for any shares or debentures

on the faith of the prospectus for any loss or damage

he may have sustained by reason of any untrue or misleading statement .



` : Directors may also incur personal liability for:

` A.Irregular allotment, i.e., allotment before

minimum subscription is received .

` B. For failure to repay application monies in

case of minimum subscription :: Under SEBI

guidelines, in case moneys are not repaid within 130

days from the date of the issue of the prospectus, the

directors of the company shall be jointly and severallyliable to repay that money with interest at the rate of 6 %

per annum on the expiry of 130th day.



` Directors will also be held personally liable to the

third parties where their liability is made unlimited

(i.e., vide alterations of Memorandum by passing

special resolution).

` Memorandum of a company may make the liability

of any or all directors, or manager unlimited.



`Directors are made personally liable

for the debts or liabilities of a

company-insider trading .



` A director is the agent of the company except for

matters to be dealt with by the company in general

meeting and not of the other members of the

Board.

` The absence of a director from meeting of the

Board does not make him liable for the fraudulent

act of a co-director on the ground that he ought tohave discovered the fraud.



` Directors are bound to use fair and reasonable

diligence in discharging the duties and to act honestly,

and act with such care as is reasonably expected from

him, having regard to his knowledge and experience.

` In R.K. Dalmia and others v. The Delhi Administration,it was held that ³ A director will be personally liable on

a company contract when he has accepted personal

liability either expressly or impliedly. Directors are the

agents or the trustees of a Company.



` Director¶s liability to the Company may arise

where the directors are guilty of negligence,

committed breach of trust, misconduct and has

acted ultra vires and the funds of the company

have been applied for such an act.



` A director may be held criminally liable for any offencecommitted by the company, where he has aided,abetted, counseled, or procured the commission of theoffence.

` Just as individuals owe a duty not to harm or injureothers in society without justification, so do companiesowe a duty not to poison our water and food, not topollute our rivers, beaches and air, not to allow their workplaces to endanger the lives and safety of their

employees and the public, and not to sellcommodities, or provide transport, that will kill or injure people.



` A Director of a company in liquidation must co-

operate with the liquidator in realizing the assets

of the company and distributing them among the

creditors and contributors of the company.

` If they fail to do so they are liable to imprisonment,

which may extend to five years and fine.

` Directors are also liable for theft of the company¶s

property or for false accounting.



` Any breach involving a failure of honesty on thedirector's part;

` performing an act which is not lawful. e.g byreason of some prohibition imposed by statute or

the general law;` Any breach of duty which results in the company

performing an act not in adherence with thecompany's AO A.;

` A breach of duty bearing directly upon thepersonal rights of the individual shareholders;



` Any contract between the directors and

the company, or any similar provision in

the Articles which attempts to exempt

the directors from liability for negligence, default or breach of trust

towards the company is void.



` . The court has power to relieve a director from

some civil or criminal liabilities for negligence,

default or breach of trust if it is satisfied that the

director has acted honestly and reasonably and in

all the circumstances he ought fairly to be

excused.



` (1) that directors must act in good faith in what theybelieve to be the in the best interest of the company

` (2) they must not exercise powers conferred uponthem for purposes different from those for which theyare conferred.

` (3) that they must not fetter their discretion as to howthey shall act and

` (4) that without the informed consent of the company,they must not place themselves in a position in whichtheir personal interests or duty to other persons are

liable to conflict with the duties to the company.



1. Are there 3 or more NE directors for every 1

inside director?

2. Are the insider directors limited to CEO,COO &

CFO ?

3. Do the directors routinely speak to senior

mangers who are not represented on the board?

4. Is the board of right size:8 to 15 members?

5. Does audit committee review high exposureareas.



6.How does CEO compensation fixed ±formula?.

7. Do NEDs annually review succession plans for senior management?

8. Do NEDs formally evaluate CEO¶s strengths,

weakness, objectives ,personal plans & performanceevery year .

9. Does nominations committee rather than CEO scoutfor new NEDs or CEO.

10.Does the management of the company furnish

details of agenda items well in advance with backgroundpapers to Directors for qualitative discussion.



11. Are the board members spending qualitative time

on agenda items rather than the monologue of the

management team?

12.Is the board actively involved in the long range

business strategy form start of the planning cycle ?

13. Is performance/contribution of each of the director

is periodically reviewed ?

14. Does the company take right measures to built trust

among directors ?15. Does the NED¶s question inter company deals ?

3.Corporate Management

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